Category: Retirement

How Can You Prepare for the Top Retirement Challenges?

It has been said that the aging of baby boomers—those born between 1946 and 1964—is analogous to a bowling ball moving through a python. At each life stage, the vast numbers of boomers have made significant impacts on our society.

So with over 75 million boomers already beginning to reach age 65 and many more to come, expectations of societal change are considerable. The fact that boomers as a part of the US labor force shrank from 82 percent in 2003 to just 66 percent in 2013 gives us a sense of the magnitude involved.[1]

Many baby boomers will be challenged with creating a sustainable, consistent retirement cash flow to allow them to focus on things they really care about and to enjoy a “Life Well Lived.” The task is compounded during a low interest rate environment. Whereas in earlier times, interest-bearing investments such as CDs and bonds could provide generous, steady cash flow, today’s income investor may need a different, perhaps more hands-on approach.

The challenges will vary to the extent that some impact society as a whole (“macro” oriented), which require both effective preparation and prompt response. Others occur within our personal life experience (“individual” oriented) and therefore require more introspection. Similarly, some are more financial while others are lifestyle based. Our clients find gratification and confidence with this holistic approach, which sees effective retirement as a balance between the financial and emotional aspects of retirement planning.

2017-10 Macro-Individual Challenges

Our process, refined over more than 35 years of delivering exemplary award-winning service[2], has identified nine key challenges that, when properly addressed with solutions articulated herein, help our clients achieve retirement confidence. A brief mention of each challenge is followed by the resources we make available within this publication or within our practice, to support a successful resolution.

1. Longevity Risk: How can I be confident of not outliving my savings?

Life spans are growing with improved lifestyles and medical technology. And with increased longevity comes the added challenge of assuring adequate financial support for those additional years. The statistics are impressive:

• A male age 65 has a 50 percent chance of living to age 85 and a 25 percent chance of living to age 92.
• A female age 65 has 50 percent chance of living to age 88 and a 25 percent chance of living to age 94.
• A couple age 65 has a 50 percent chance of one living to age 92 and a 25 percent chance of one living to age 97.

2017-10 Longevity Risk

 

Keys to successfully address the Longevity Risk are:
• Objectively evaluate the feasibility of your goals (see our white paper: Are Your Financial Goals Achievable? The Importance of Having “Your Number”).

• Create a realistic budget (see our white paper: What Are Your Retirement Expenses? For How Long Can Your Savings Cover Them?).

2. Paradigm Risk: How can I replace income from traditional retirement sources such as pension and social security?

The fact is, worker participation in employer funded defined benefit pension plans is less than half of what it was in 1990, while workers covered by employee funded defined contribution plans have doubled over the same period.[3] Further, social security as a percentage of total retirement resources for those age 65 has fallen to just 38 percent and continues to represent a declining portion of retirement resources.[4] In our lifetimes we have witnessed a shift from a caretaker society, where institutions provided for our retirement support, to a self-sufficiency society where much more of our retirement support is left to ourselves.

Keys to successfully address the Paradigm Risk are:

• Develop an effective cash flow strategy (see our white paper: Will Your Withdrawal Plan Sustain You Through Retirement?).

• Optimize your social security retirement benefits (see our white paper: Managing Social Security Retirement Benefits).

• Create your own personal pension plan (see our white paper: Can Annuities Benefit Your Situation?).

3. Inflation Risk: How can I preserve purchasing power?

Relatively low inflation rates can lull us into a false complacency. But even at modest 3 percent levels, $1,000 in today’s dollars will buy just $737 worth of goods and services in 10 years (26 percent reduction in purchasing power), and $543 in 20 years (46 percent reduction in purchasing power). Plus, a growing number of economists suspect that recent adjustments to the government’s inflation measures may be understating the true inflation rate.[5]2017-10 Shrinking Dollar

Keys to successfully address Inflation Risk:

• Understanding the underlying inflation rate (see our white paper: Controversy Over Inflation: Is There More Than We Are Aware Of?).

4. Investment Risk: How can I not be derailed by market losses?

Market risk is often measured by volatility. It is important to balance the need for growth with minimizing the potential for investment loss

Keys to successfully address Investment Risk are:

• Understanding how annuities can provide steady cash flow (see our white paper: Can Annuities Benefit Your Situation?).

• Understanding how bonds may have more risk than previously thought (see our white paper: Bond Investing: Is Following Conventional Wisdom Always Best?).

• Understanding how Exchange Traded Funds work (see our white paper: Are ETFs Right For You?).

Asset Class Returns
Highs and lows: 1926-2016

Asset Class Returns 1926-2016

Past performance is no guarantee of future results. Each bar show the range of annual total returns for each asset class over the period 1926-2016. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2017 Morningstar. All Rights Reserved. The highest and lowest return experienced by an asset class provide valuable insight into its demonstrated risk. All assets contain some degree of risk; however, some assets are considered more volatile (riskier) than others. This image illustrates the range of annual returns over the period 1926 through 2016 for five asset classes commonly considered in the asset allocation process. Generally, the safest, most stable asset class has been Treasury bills, as indicated by their narrow range of historical returns. Both intermediate-and long-term government bonds have wider ranges of returns than Treasury bills. This is because longer-maturity bonds are more interest-rate sensitive, resulting in greater price volatility. The asset classes with the widest range of returns are also the asset classes with the highest compound annual returns: large and small stocks. Although stocks have historically offered higher returns, they have also experienced greater volatility than bonds and Treasury bills. Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks, are subject to significant price fluctuations and business risks, and are thinly traded.
About the data: Small stocks are represented by the Ibbotson® Small Company Stock Index. Large stocks are represented by the Ibbotson® Large Company Stock Index. Long-term government bonds are represented by the 20-year U.S. government bond, intermediate-term government bonds by the five-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index.

5. Emotional Risk: How can I find fulfillment in retirement?

Major life transitions such as retirement can invoke unforeseen emotional responses that can inhibit quality of life. Clients have found that anticipating and proactively addressing these can make a significant difference in their retirement enjoyment.

Picture3.png

• Guilt: After a lifetime of building savings, many can feel guilty over spending as they reach retirement.

• Reduced Self-Esteem: Ending a career can mean a loss of identity and self worth.

• Isolation: When work ends, there can be a loss of social connections.

• Depression: Upon ending a career, there can be a loss of purpose and life involvement.

• Fear and Anxiety: These feelings can arise from the unexpected, the unknown and the “what if’s.”

• Regret: Uncompleted wishes, desires and fantasies about who you are and what you want to experience in life. These can involve experiences you may want to have that add passion, purpose and joy to your future. However, there can be burdens from “ghosts of the past” that may dilute potential enjoyment.

Keys to successfully address Emotional Risk include an enhanced self-awareness of your priorities, likes and dislikes.

• Understanding your core priorities and dreams through exercises such as the Values-Based introspection process we offer our clients.[6]

2017-10 Maslow's Hierarchy of Needs

6. Medical Risk: How can I prepare so that medical and long-term care expenses do not prematurely deplete my savings?

2017-10 Medical Risk

Keys to successfully address Medical Risk include:

• Understanding how long-term care needs can be insured (see our white paper: Can Innovative Strategies for Addressing the Long-Term Care Challenge?).

7. Withdrawal and Tax Risk: How can I prioritize my withdrawals to protect against tax erosion and premature depletion?

Keys to successfully address Withdrawal and Tax Risk include:

• Understanding how tax planning can preserve your savings (see our white paper: Will Your Tax Planning Help Sustain Your Retirement Nest Egg?).

• Understanding how to prioritize your retirement withdrawals (see our white paper: Will Your Withdrawal Plan Sustain You Through Retirement?).

8. Legacy Risk: How much can I spend? How much should I leave to heirs and philanthropies?

It is all about trade-offs and prioritizing your retirement resources.

2017-10 Legacy Risk

Keys to successfully address Legacy Risk include:

• Understanding how to quantify and balance your competing financial goals (see our white paper: The Importance of Having “Your Number”).

• Understanding how to prepare your heirs for inheritance (see our white paper: How Can You Avoid Wealth Transference Failure?).

9. Oversight Risk: How can I remain on track and be proactive?

To help our clients stay engaged and feel in control of their finances, we recommend an initial analysis plus a quarterly review process which is depicted in the attached graph.

Consult Process KWM

This discussion introduces how the following articles can help you achieve financial confidence. I trust you will find this a valuable resource capable of making a significant difference in your retirement planning efforts. Please do not hesitate to let me know should you have any thoughts or questions.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only). Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

__________
1 “What Baby Boomers’ Retirement Means for the US Economy,” by Ben Casselman, Five Thirty Eight Economics May 7, 2014 http://fivethirtyeight.com/features/what-baby-boomers-retirement-means-for-the-u-s-economy/
2 “Hall of Fame”
3 “Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities,” by Katharine G. Abraham  and Benjamin H. Harris Nov. 6, 2014 Brookings http://www.brookings.edu/research/papers/2014/11/06- retirement-longevity-annuities-abraham-harris
4 “Just the Facts on Retirement Issues” by Center for Retirement Research at Boston College, Feb. 2003, Pg. 3
http://crr.bc.edu/wp-content/uploads/2003/02/jtf_6.pdf
5 “Controversy Over Inflation: Is There More Than We Are Aware Of?,” by Mitchell Kauffman, MBA, MSFP, Certified
Financial Planner, 2011
6 “Values-Based Financial Planning: The Art of Creating an Inspiring Financial Strategy,” by Bill Bachrach
http://www.billbachrach.com/store/values-based-financial-planning/

Will Your Withdrawal Plan Sustain You Through Retirement?

Looking before you leap…” isn’t nearly as important as knowing how and where you will land. This rendition of Samuel Butler’s famous quote has no more fitting application than when considering retirement planning.

More than ever, people are retiring with wealth.  But they often do so without having an effective plan that determines from which account they should withdraw first to best preserve their assets.  Creating a personal distribution program is the best assurance of generating a tax-efficient cash flow. Not only can this extend portfolio longevity and minimize chances of running out of money prematurely, but studies show minimizing unnecessary tax erosion can effectively equate to adding up to 0.70 percent additional annual return without assuming more investment risk.[1]

When creating a withdrawal plan with clients, we advise that five critical steps be followed:

  1. Estimate Normalized Retirement Expenses

Things often change as soon as the best laid plans are made; so is the case with estimating annual expenses.  Knowing change is so much a part of our lives, we advise investors to first develop a “normalized” expense profile that considers those outlays expected year in and year out (see our white paper: What Are Your Retirement Expenses?).

  1. Estimate Extraordinary Expenses 

Trips, home repairs, medical expenses, supporting kids and parents—unforeseen items can crop up to thwart even the best plans. Figures that estimate timing and amount should be added to the expense baseline to help better prepare for the eventual reality.

  1. Estimate Fixed Income

Obligatory inflows represent a cornerstone of our cash flow model.  Common sources may include:

  • Social security retirement benefits
  • Traditional pension payouts (note if cost of living adjustments are provided)
  • Required Minimum Distributions (RMDs) for investors over age 70 ½
  • Payout annuities where accounts have been “annuitized” and may continue for a specified period or for one or more lives
  • Employment such as consulting and part-time work
  1. Prioritize Discretionary Sources

Creating a system that prioritizes from which accounts cash can be drawn first will help optimize tax costs and is our best assurance of portfolio sustainability, e.g., not running out prematurely.

  1. Identify the “Gap” 

The difference between obligatory in-and-out flows yields a “gap,” that is, the shortfall between expenses and income to be met from portfolio withdrawals.     

gap

In prioritizing withdrawals and from which accounts they might occur, investors find it helpful to first picture their portfolio as consisting of four distinct “buckets” capable of generating cash flow with varying tax implications as noted:

  • Taxable: Accounts that incur taxes whenever earnings or transactions are realized. Examples include dividends, interest and capital gain, all of which are usually taxable whether reinvested or taken as distributions.
  • Tax-Free: These accounts provide cash flow without incurring any income taxes (may be subject to state, local and alternative tax depending on issue). Examples include municipal bond interest (may be federal or federal and state exempt), life insurance cash value loans, and qualified withdrawals from Roth IRAs.
  • Tax-Deferred: Typically consist of annuities that have discretionary withdrawal capabilities (as opposed to those that have been annuitized and would be included under “fixed income” above). Discretionary annuity withdrawals are typically taxed as earnings first until drawn down to principal, which can then be accessed without tax implications.[2]

It is also important to note that since investment changes can often be made within deferred accounts without tax implications, deferred accounts can offer a tax-free environment within which investment rebalancing can more easily occur.

  • Tax Qualified: Pre-tax investments such as IRAs, 401(k)s, profit sharing and pensions reside here because all distributions are typically fully taxable (except for rare accounts that may hold “after-tax” contributions). As such, withdrawals from these accounts are usually the least tax efficient of the four buckets. Similar to tax deferred accounts, investment rebalancing can occur with no tax cost.

Effective “withdrawal sequencing” helps us optimally prioritize distributions from both a tax as well as an investment standpoint, which again gives us our best chance of avoiding premature portfolio depletion.  Depending on whether a higher or lower tax bracket is expected in upcoming years, tactics and priorities will vary.  Specifically:

Higher Tax Bracket: In years where a higher marginal tax bracket is expected, spending corpus from the taxable bucket first can be an inexpensive tax strategy for enhancing cash flow.  Although spending principal may push against conventional wisdom, doing so can actually enhance portfolio sustainability.  Several factors account for this:

  1. Taxable dividends and interest are often reinvested but are taxable nonetheless, so diverting these can provide added cash flow without incurring additional taxes.
  1. Appreciation from investment sales can be taxed as long-term capital gains which are typically taxed at rates less than ordinary income, another inexpensive way to generate cash flow.
  1. Postponing withdrawals so deferred and qualified accounts can remain in those tax-friendly environments longer can effectively help replenish assets spent elsewhere.Particularly since growth within these accounts is not eroded by taxes and significant withdrawals, these offer an accelerated growth potential.

When done properly, a greater cash flow can be generated for the tax dollar expended.

Lower Tax Bracket: When we anticipate being in a lower marginal bracket, it is advisable to accelerate withdrawals from tax-deferred and qualified buckets.  Although this too may seem counter-intuitive, it is often more advantageous to optimize taxes in the lower brackets than strive to pay the lowest dollar of taxes possible.  Key reasons for this include:

  1. Higher brackets in future years may be due to changes in personal circumstances and/or bracket increases from the government’s deficit reduction efforts. Therefore, accelerating these taxable distributions beyond RMDs allows the current tax rate on these funds to be “locked in” now.
  1. Preserving tax-advantaged sources (assets taxable at lower rates) for future access is helpful when tax brackets may be greater so that lower taxable assets can accumulate and be withdrawn at a later, more opportune date.
  1. Accelerating qualified distributions can reduce future required withdrawals when tax brackets could be greater and potentially reduce future income taxes for heirs.

Of course, over time, increased taxes and reduced tax-advantaged growth can cause lower terminal wealth and jeopardize portfolio longevity.  However, this strategy provides persuasive advantages particularly when tax brackets fluctuate between higher and lower in alternating years.

Optimizing Taxes by Prioritizing Retirement Withdrawals

6

Effectively managing RMDs can be a valuable component of a personal distribution plan.  As legal requirements for those over age 70 ½, RMDs can represent a cornerstone of mid and late-retirement cash flow.  Since they are ordinary income (except where post-tax distributions are involved), RMDs come at the highest tax cost compared to other distributions such as qualified dividends and capital gains. There are two important strategic approaches to consider:

  1. Qualified Charitable Donations (QCDs): This program, renewed annually and made retroactive to each January 1st, allows RMDs to be satisfied with amounts that are paid directly to charities with no tax implication (up to specified limits[iii]). Particularly for those investors who are philanthropically inclined, RMD requirements can be satisfied without incurring the usual ordinary income tax on distributions.  What cash flow is lost from this effort can be augmented by taking tax-qualified dividends and capital gains. Overall the strategy can enhance tax efficiency and portfolio sustainability.
  1. Roth IRA Rollover: This allows taxable IRA distributions to be deposited into a Roth IRA for later tax-free withdrawal. It is particularly beneficial when a low tax bracket year is followed by a higher bracket year; this strategy can expand the tax-advantaged resources until times when they could be most needed (see Roth withdrawal limitations[iv]).

Especially since tax planning must go hand in hand with effective investment management, there are several practices that should be considered:

  1. Generating Excess Cash Balances beyond what may be immediately needed, as long as it is prudent from a tax standpoint, can help create a buffer for potentially greater living expenses in future years.
  1. Taxable Assets are generally the most advantageous to spend down before deferred, qualified and tax-free assets. These actions need to be carefully orchestrated with investment allocation and estate planning considerations as well.
  1. Overweighted and Concentrated Asset Holdings can be sold as priority especially from taxable accounts to better align the portfolio with long-term targeted allocations.
  1. Loss Harvesting can offer guidance for priority liquidations. Investors may be hesitant to sell assets at a loss as they hope for an eventual recovery.  It is important they consider that such sales need not mean that the position will be abandoned entirely because it may be added back to the qualified account (so long as wash-sale rules are observed) to regain the exposure and desired portfolio balance.
  1. Postponing Deferred and Qualified distributions allows tax-deferred growth to continue longer, which can potentially enhance accumulation and portfolio longevity. The result can be greater terminal wealth and portfolio success rates.
  1. Determining Specific Assets to Liquidate by selling those that might generate the lowest taxable gain or realize a loss, then rebalance the portfolio within deferred and qualified accounts to ensure proper portfolio alignment with target allocation.
  1. Asset Cultivation when no overweight exists can be done by selling proportionally from all asset classes until the selected account is depleted or spending needs are covered. Once depleted, a similar approach can be used with other accounts.
  1. Large Tax Deductions, such as medical bills, when they occur, can provide an opportunity to offset additional tax-qualified withdrawals.
  1. Recommended Withdrawal Rates range from 3-6 percent. However, in low interest rate environments, a growing number of studies suggest that a 4 percent rate may be the only one that can “… avoid depleting the portfolio (prematurely).”[v]

These techniques potentially allow investors to spend and rebalance their portfolios with minimal tax costs. When done properly, studies show that portfolios can save tax erosion to such magnitudes that the benefit can in effect add up to 70 bps (70 percent) of additional annual return.[vi]  The greatest benefit, it bears repeating, is realized when taxable and tax-advantaged balances are about the same size and the investor is in a high marginal tax bracket and/or fluctuates between high and low brackets. 

Added Value from Different Withdrawal Strategies

Up to 70 bps of value added from optimizing withdrawal strategies without adding investment risk.

pic 5

 

These hypothetical data do not represent returns on any particular investment.  Each internal rate of return (IRR) is calculated by running the same 10,000 VCMM simulations through three separate models, each designed to replicate the stated withdrawal order strategy listed. Greatest benefits occur when the taxable and tax-advantaged accounts are roughly equal in size and the investor is in a high marginal tax bracket.  If an investor has all of his or her assets in one account type (that is, all taxable or all tax-advantaged), or an investor is not currently spending from the portfolio, the value of withdrawal order is 70 bps. The greatest benefits occur when the taxable and tax-advantaged accounts are roughly equal in size and the investor is in a high marginal tax bracket.  Source: “Quantifying Vanguard Advisor’s Alpha” by Vanguard research.

You should compare your current and prospective account features, including fees and charges, before making a rollover decision. Distributions that are not properly rolled over to another retirement plan or account may be subject to withholding, income taxes, and if made prior to age 59½, may be subject to a 10 percent penalty tax. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. You should discuss any tax or legal matters with the appropriate professional. 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.KauffmanWealthManagment.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

[1]Putting A Value On Your Value: Quantifying Vanguard Advisor’s Alpha,” by Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP, Michael A. DiJoseph, CFA and Yan Zilbering, Vanguard Research 2014 Pg. 20-21

[2]How Annuities Are Taxed,” by Kimberly Lankford, Kiplinger July 10, 2009

[3]Charitable Donations from IRA’s,” IRS http://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs

[4]IRA FAQs-Rollovers and Roth Conversions,” IRS http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-IRAs-Rollovers-and-Roth-Conversions

[5]Why 4% May Be A Sustainable Withdrawal Rate,” by Gregg S. Fisher, FA Advisor Feb. 14, 2014 http://www.fa-mag.com/news/why-4–may-be-a-sustainable-withdrawal-rate-16337.html

[6]Spending from a Portfolio: Implications for Withdrawal Order for Taxable Investors,” by Colleen M. Jaconetti, CPA, CFP and Maria A. Bruno, CFP Vanguard Investment Counseling and Research 2008

 

How Can Stealth Inflation Threaten Your Retirement?

How can it be in recent years that gas prices exceeded $4 per gallon and food prices rose, yet inflation, as measured by Consumer Price Index hovered around the 2 to 3 percent range?  Does there seem to be a disconnect to you?

If your answer is “yes”, you are not alone.  Despite repeated reassurances by the Federal Reserve Bank that inflation was well in hand, a growing number of notable economists have been questioning how accurately the CPI actually tracks the true rise in the very same consumer goods and services that we use every day.

Continue reading “How Can Stealth Inflation Threaten Your Retirement?”

Are Your Financial Goals Achievable? The Importance of Having “Your Number”

Regardless of your level of affluence, studies show that you need to know what you want out of life before you can achieve it.  So states the wisdom of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life.[I]

Eisenberg’s number refers to that amount of savings a person or couple must accumulate to enjoy a “secure” post-career lifestyle. His “completely different view” is based on the premise that the clearer your goals, the more likely they can be achieved. Establishing a precise goal, analogous to business planning, can be the best assurance of its attainment.

In practice, “Your Number” is typically not a single number but rather a series of numbers. Knowing the important role this kind of objective clarity can provide to our clients, we have spent considerable effort to develop this capability. Our version is a process capable of helping clients objectively understand their trade-offs so they can make more informed decisions.

For those still saving, as well as for those near or in retirement, clients often grapple with covering their own financial needs versus how much to leave for their heirs and/or charity. Many have found that by having “Your Number,” they are better able to address these issues once they know the estimated cost of supporting their lifestyle. With what remains, they can more confidently decide how much can go to philanthropy and heirs, and whether that happens during their lifetime or after they pass.

2017-10 Legacy Risk

Lifestyle Goals Feasibility: Determining the feasibility of your lifestyle goals is an important starting point. Certainly if overly ambitious, the low probability of attaining those goals may render other goals inconsequential. Our process involves providing an average, annual after-tax return (ROR) needed for the lifestyle goal’s attainment. That ROR can then be compared to historic returns of different asset classes to determine the associated risk involved.

For example, if to achieve their lifestyle goals the study calculates that a 10 percent average ROR is needed, that figure compared to historical returns, may suggest a more aggressive portfolio heavily weighted in growth stocks.  A specific, meaningful discussion can then ensue wherein the clients can consider how comfortable they may be with that level of risk. If not, to bridge the “gap” they can consider options that may include reducing  current  spending, increasing  savings,  postponing retirement  age,  or some combination.  Whatever they decide, they are able to feel more in control to do so based on objective feedback that can make these oft times nebulous conversations, much more tangible.

pic 2

“How am I Doing?” is likely the most common question clients have asked over my 35+ years as an advisor. The “Your Number” process helps address this question by projecting the value a portfolio needs to attain each year to assure we are on track. For example, a couple may have a $133,000/yr. retirement income goal when the husband reaches his desired retirement in five year’s time. To generate that, they may need nearly $2 million. Their “Your Number” study may suggest they will need $1,827,515 in three years to show they are on track to their retirement income goal. We are able to compare their then- prevailing balance to that figure, to readily gauge our progress and, hopefully, ease their concern.

“Am I Running Out of Money?” Concern over spending too much and not having enough later in retirement is another common concern. Again, the “Your Number” process gives us annual benchmarks from which clients can easily determine where they stand and if they may be spending too much, or perhaps not spending all that they could. Similarly, at ten years into retirement, the same client’s plan will show a $1,869,340 balance is needed to help assure they will not run deplete funds prematurely. Comparing that to their then-current balance can quickly help them determine where they stand. This capability gives clients a greater sense of confidence and control over their futures.

Benefiting from Greater Clarity as We Age: The clarity provided by this approach may prove consistent with the normal aging process.  “As people mature, their cognitive patterns become less abstract and more concrete…,” according to psychologist David Wolfe.[ii] Research attributes this to a normal shift from left to right brain orientation during the aging process. The result is a sharpened sense of reality, increased capacity for emotion and an enhanced sense of connectedness.

The left hemisphere helps us with rational functions such as logic and organized, quantitative processes. The right hemisphere is the intuitive side that gives us creativity and analogic reasoning. Theory suggests that many of us may be slightly dominant in one side or the other, which may lend insight into how best we learn.  “In other words… ,” as Daniel Pink notes in his recent book, A Whole New Mind, “… as individuals age they place greater emphasis in their own lives on qualities they might have neglected in the rush to build careers and raise families; purpose, intrinsic satisfaction and meaning.”[iii]  It makes intuitive sense that as we age and face our own mortality, we would become more sensitized to higher level emotional issues. That there might be a neurological or bio-chemical reason for this seems intriguing. Evidence of this trend may be found in the fact that over 10 million U.S. adults now engage in some form of regular meditation, double the number in 2005. Further, about 15 million people currently practice yoga, twice that in 1999.

While greater specificity is needed around the quest for money, Eisenberg cautions that we need to know ourselves and spend some time determining what makes us happy before we can make informed plans for leaving the world of active income.  What do you want your retirement to be? Who do you want to be in retirementEisenberg’s research shows that even the affluent tend to procrastinate on addressing these issues.

Thus it would seem that, when tackling the three main questions we each must address—What will my retirement look like? When can my retirement plan happen? How much will it cost?—the traditional financial services approach makes a fundamental error in attempting to address the last question first. Eisenberg muses that we need to know what we need the money for before we can estimate how much. Hence the rise of various types of “life coaches” to help us wrestle with these more elusive issues.

The bottom line of the “Your Number” process is that, regardless of your state in life, better planning can often help both from an aesthetic and practical standpoint. As Eisenberg notes, “An unexamined life may or may not be worth living, but it is certainly more expensive.”

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

[i] The Number: A Completely Different Way to Think About the Rest of Your Life, by Lee Eisenberg  Free Press 2006

[ii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006 Pg. 60

[iii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006

Are You Effectively Managing Your Social Security Retirement Benefits?

With employment opportunities becoming increasingly challenging for seniors, more and more clients in their 60s are addressing social security issues sooner than they expected, and many of them have these questions:

  1. Early Retirement Benefits: When should I begin taking my benefits?
  2. Taxation of Benefits: How can I minimize the tax on my benefits?
  3. Delayed Retirement Credits: Does it make sense to postpone my benefits?
  4. Spousal Benefits: When should my spouse take benefits?
  5. Benefit Contingency Plans: How can I replace some/all of my benefits if social security changes?
  6. Strategies to Consider: What tactics might enhance my lifetime benefits?

Early Retirement Benefits

Allows eligible recipients to begin receiving their benefits four to five years prior to their full retirement age (65-67 depending on year of birth). The major disadvantage is that benefits are reduced by 20-30 percent for the recipient’s lifetime; spousal benefits can also be limited depending on circumstances.

Despite these drawbacks, about 45 percent of eligible Americans elect to receive early benefits (SSA Annual Statistical Supplement, released Feb 2015). Early benefits have appeal to those who are not working, need cash flow, and/or are concerned that social security’s days may be numbered—a “take the money and run” philosophy.

Helping clients calculate their “break-even age” can assist with this decision. As an example, if you are currently 62 and your full retirement age is 66, your monthly benefit of $1,600 would be reduced to $1,200 (by 25 percent) if you started today.  By about age 77, you could break even (total early benefits would equal those received at full retirement) at $230,400.  The break-even age increases to age 82 if we assume the early benefits were invested at 6 percent annually.  So, in this simplified example, if the client has a high probably of living past 77 (or 82, depending on your assumptions), he/she would be better off waiting until full retirement.  The Social Security Administration’s on-line calculator (http://www.ssa.gov/pubs/10147.html) is a great resource to help with these calculations. 

Early Benefits Earning Limits

For those who take early benefits and are employed with compensation over the “earnings limit,” Social Security will take back $1 of benefit for every $2 earned over the limit. This continues until the year in which full retirement age is reached. During the year they reach full retirement age, the new earnings limit applies only for the period before the month they reach FRA. If earnings exceed the limit in this period, benefits are reduced $1 for every $3 earned over the annual earnings limit.

The amount that is withheld, however, may not be lost. That is because the SSA will, after full retirement age, recalculate the benefit amount and give credit for any months when benefits were reduced because of earnings.

Taxation on Benefits

Benefits can be taxed as ordinary income, depending on the recipient’s Preliminary Adjusted Gross Income. Preliminary Adjusted Gross Income (P-AGI) includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.  For P-AGI over certain amounts, a percentage of benefits become taxable. This applies to all social security recipients; there is no age forgiveness so it is important to check the prevailing AGI threshold to coordinate discretionary income such as IRA withdrawals.  We might consider “bunching” income and deductions in alternate years.

Delayed Retirement Credits

For those who postpone benefits and continue working past full retirement age, their lifetime benefit can be increased up to 8 percent for each additional year worked through age 69. The precise formula is based on birth year.  So for a client who is 66 this year and entitled to $1,600 of full retirement benefit today, working an additional two years could increase their monthly benefit to $1,856.  Thus, for clients who are active, in good health and have a family history of longevity, there may be benefit to continue working. (see http://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0720.html)

Spousal Benefits

For those age 62 and over whose spouses are alive and receiving benefits, they may be eligible for spousal benefit even if they do not have enough of their own work credits or have never worked at all. The maximum is 50 percent of the spouse’s benefit and may be reduced depending on how many months prior to full retirement age that payments begin.  Upon application, the Social Security Administration will automatically pick the greater of the spousal benefit or actual benefit based on own work credits.

The wife’s benefit may be optimized if she claims her benefit at age 62 (see study by Steven A. Sass, Wei Sun Center for Retirement Research at Boston College http://works.bepress.com/anthony_webb/26/). Because most husbands have higher lifetime earnings and shorter life spans, women often receive the majority of spousal and survivor benefits.  When a spouse dies, the survivor can claim the greater of their own earned benefit or their spouse’s earned benefit.  This may be reduced if claimed prior to full retirement age.  

Benefit Contingency Plans

We prepare clients for a number of possible changes as the social security system works to remain viable. Proposals that may be considered include:

  1. Raising the ceiling on the maximum wage base from current levels ($127,200 in 2017) to $250,000;
  2. Accelerating by 5 years the gradual increase in full retirement age to 67;
  3. Modifying the benefit calculation to reduce benefit growth;
  4. Introducing “means testing” that could increase taxation and/or reduce benefits for recipients with household income over specified thresholds.

Whatever the outcome, it is critical that we offer clients “contingency plans” capable of replacing benefits that could be lost as a result.

Strategies to Consider

Taking Early Benefits and Investing the Cash: Consider the above example wherein a client begins his $1,200 early benefit at age 62 and invests it at 6 percent annually. After 5 years he would have about $57,811 accumulated, which could potentially generate the $400 per month difference (between full and early retirement benefit) for about 22 years.  But if the money earns 3 percent, that benefit is only generated for about 13 years.  Obviously much here depends on actual investment returns and longevity.

Make Up for Low Earnings Years: In general, for those born after 1928, benefits are calculated by averaging 35 highest years of indexed earnings. For those who made little or nothing in one or more of those 35 years (often those who took off to raise family), waiting to retire until normal retirement age might increase benefits because each year they wait to retire gives a chance to earn enough to replace a lower year of earnings in the calculation.

Social Security Buy Back: Undoing a decision to receive early retirement benefits could be advantageous under certain circumstances.   Say a couple, both now 70, took early benefits at 62 and now receive $11,556 annually.  Had they waited until 70, they would be receiving $20,000 annually instead, despite their not having worked since age 62.  If they each pay back $79,305 in benefit and reapply, they effectively purchased an additional $8,444 of annual inflation adjusted annuity benefits.

Bottom line, there are no hard fast rules as each client situation needs to be evaluated based on their individual circumstances. Also, while we can educate, there is no substitute for the client having a face-to-face meeting with a Social Security Administration representative and consulting their tax adviser. As advisors we can add tremendous value by making clients aware of the various issues and guiding them through their decision making process.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Can Innovative Strategies Help Address Your Long-Term Care Challenge?

When planning for retirement, all possible risks must be considered and evaluated. One of the most commonly overlooked is the potential need for long-term health care (LTHC) for you and/or your spouse. The cost of LTHC can be staggering and can derail even the best laid financial plans. When evaluating the risk of the cost for LTHC, the old adage about three ways to manage risk can be clearly applied.

Continue reading “Can Innovative Strategies Help Address Your Long-Term Care Challenge?”

How Can You Avoid the Top 10 Estate Planning Pitfalls?

Upon your death, the best thing you can do for loved ones upon death is allow them to resolve your estate quickly and easily, so they can get on with their lives. But people often fall into 10 estate planning traps. Here is how to avoid them. Understanding and avoiding these common errors can help minimize the tax bite for your heirs and assure that your wishes are fulfilled.

1.  Not funding your living trust

This important trust places your assets “in bin” while you are alive. Postmortem a pre-appointed trustee is provided to manage them. Living trusts can usually help avoid probate (a costly court proceeding that decides which heirs receive your assets after your death) and help reduce taxes on your estate. No matter how thorough your living trust is, it needs to be adequately funded. Generally, to be effective, you must move property and assets into the trust by making the trust the legal owner of those assets. If you don’t make the appropriate title transfers, assets may be subject to probate and eventually, estate taxes.

2.  Too much JTWROS property

Joint-tenancy-with-right-of-survivorship (JTWROS) is a type of brokerage account that you share with your family members while you are alive. After you pass away, your survivors inherit your share of the account. While titling assets under JTWROS does avoid probate, it does not avoid estate taxes. It is important to keep in mind that property titled JTWROS goes to the surviving joint tenant regardless of what a will or trust says.

3.  Leaving too many assets to a surviving spouse

Under the current tax laws, you are allowed to transfer as many assets in your estate as you wish to your spouse either while you are alive or at your death. The problem and extra tax may come when those assets pass to the next generation. A major goal of a living trust is to preserve the first-to-die spouse’s applicable exclusion amount. This is the amount that is exempt from estate and gift taxes. It is advisable to check the current amounts with your attorney.

4.  Not equalizing assets through gifts between spouses

This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse’s name can create problems when the non-titled spouse dies first and does not pass on any property under his or her credit.

5.  Not having a will

If you die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

6.  Improper ownership of life insurance

Policies are often owned by the insured, payable to the insured’s estate or survivors. This is included in the owner’s taxable estate and is therefore subject to estate taxes. You can avoid this by giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

7.  Being donor and custodian of a UTMA account

If you are the custodian and donor to a uniform transfer to minors account, that account will be included in your estate and possibly subject to painful estate taxes.

8.  Not knowing where all the documents are

Heirs are often burdened with hunting down accounts and documentation. A scattered estate plan by a secretive deceased person may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements and safe deposit box information in a notebook and to make your trusted heirs aware of its contents.

9.  Naming the wrong executor

The tasks facing an executor are often formidable and demanding. If you are concerned that your spouse, relatives or friends are not up to the task, consider hiring a professional or a trust company.

10. Not periodically updating an estate plan

It is human nature to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put it on a shelf and be done with them.

As your economic situation, health, family and the tax code inevitably change, so too should your estate plan. You should review your estate plan at least every couple of years. It’s best to work with an experienced advisor who can help make the necessary modifications.

Even the most sophisticated estate planning tools can go awry due to some simple oversights. Be sure to work with an experienced financial professional to help you achieve your estate planning goals.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

 

Financial Confidence in Retirement: 10 Planning Mistakes to Avoid

As more Baby Boomers approach their golden years, they are faced with a plethora of challenges. Especially for those with greater resources, the issues can be formidable. To the extent that these are effectively addressed, the promise of those Golden Years can be more readily achieved with less stress—both during and after the transition.

The Top 10 Most Common Mistakes to Avoid

  1. Procrastinating

Often people do not begin their retirement planning until retirement is upon them. Depending on your situation, most experts urge that this process begin no later than 5 years prior; ideally, at least 10 years or more.1

  1. Not Considering How Much Retirement Income Will Be Needed

Estimates vary as to how much a person’s or couple’s expenditures will change once they retire. Generally, 75 percent of current income is the rule of thumb. Obviously this has to be adjusted for factors such as projected mortgage (if any), downsizing of residence, travel, etc.

  1. Not Estimating How Long Retirement Income Will Need to Last

You hear it all the time: People are living longer, and hopefully you will be among the growing number of centenarians. Other issues may arise as well, such as the likelihood of needing to provide financial assistance to your parents, children or even siblings. Careful, objective planning and on-going management will be needed to make sure there will be enough income.

  1. Overreliance on Social Security

This program was always intended as a safety net and not to meet all of a retiree’s income needs. With questions arising as to the system’s soundness, it is more important than ever to have sound planning in our financial affairs.

  1. When to Begin Taking Social Security Benefits

While it is certainly tempting to begin retirement benefits as soon as eligible, there are some important considerations. First and foremost is the fact that, while benefits can start as early as age 62 for eligible recipients, taking those early benefits can permanently reduce the monthly amount by up to 25 percent for a recipient’s entire lifetime! And if the recipient is working and earning over the prevailing threshold amount, they could see up to a 50 percent reduction of benefits until they reach full retirement age. On the other hand, some studies imply that recipients can benefit by taking early payments and investing the amount until full retirement age is reached, while others suggest that receiving a lower benefit for a longer time can be more advantageous. Before making any decisions, it is important to consult with your local Social Security Administration Office, then carefully review your circumstances with your tax and financial advisors.

  1. Dismissing the Possible Need of Long-Term Care

It is easy to dismiss the prospect of long-term care, particularly if someone close has not fallen victim to chronic diseases such as Alzheimer’s. The reality is that if not properly planned, the ever-increasing costs of long-term home and nursing care can rapidly deplete a lifetime’s savings. If necessary, long-term care insurance can make the difference between a comfortable, calm retirement and one filled with financial insecurity.

  1. Retiring Early Without Adequate Planning

An early retirement can present exponentially greater challenges to one’s savings. Not to say it should not be done, but it is particularly critical that a game plan be developed well ahead of time to help ensure there will be enough income to last.

  1. Assuming Retirement Planning is a One-Time Event

Especially with the rapidity of life’s changes today, a plan constructed even a year ago could be sorely in need of revision. Changes in the markets, interest rates, even our own personal preferences, necessitate periodic, on-going review and adjustments.

  1. Forgetting About Income Taxes

Just because we retire does not mean income taxes go away, starting with how best to handle lump sum distributions from a retirement plan. During retirement, income tax planning can be even more critical to preserve the nest egg. Especially with the onset of required retirement plan distributions, it is important to continually evaluate whether to take the minimum or to accelerate withdrawals.

  1. Believing in Retirement Nirvana

Just like “the grass is always greener…,” retirement can be seen as the cure for many of life’s woes. For those unprepared, the added time available can create a whole new set of challenges. Statistics show that the average new retiree spends about 45 hours a week watching television (see http://www.cebcglobal.org/index.php?/knowledge/the-age-wave/). For a fulfilling retirement, it is important to prepare for the psychological as well as the financial aspects.  Just as a surgeon is advised not to operate on herself or loved ones, it is often invaluable to have independent, objective, expert advice in developing and managing a program for your retirement years.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

1Anspach, D. (2016, November 17). Steps You Must Take Within 5 Years of Retirement.Retrieved from http://www.thebalance.com.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Fargo Financial Network LLC (WFAFN).  The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years. Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community. 

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), SIPC.  Kauffman Wealth Management is a separate entity from WFAFN, Member SIPC.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

A Unique Approach to Life Transitions

“What am I going to do after I retire?” “How can I stay relevant?” “Do I have all of my bases covered to help assure financial independence after I stop working?”

Certainly questions such as these are often posed by both men and women as they ponder their future after retiring from a career. Considering 75 million baby boomers will be reaching retirement age over the coming years, there will be no shortage of inquisitors in the foreseeable future. Continue reading “A Unique Approach to Life Transitions”

Will Your Tax Plan Help Sustain Your Retirement Nest Egg?

“Goodbye tension, hello pension.” This well-known retirement quip speaks to the financial security we hope to achieve when work becomes optional. With the demise of employer-sponsored pension plans, however, creating a sustainable lifetime income stream can seem more challenging than ever.

Effective tax planning can do much to extend clients’ retirement assets and make running out of money less likely. Here are top strategies that many have found helpful.

  1. Rollover Your 401(k)*

For most clients, their employer retirement plan (401(k), profit sharing, etc.) represents a significant portion of their nest egg, so making the right decisions is imperative. Upon leaving your employment, a distribution decision may be needed. Key considerations include:

  • Age: If under 59 ½ and planning to take withdrawals, we can avoid the 10 percent premature withdrawal penalty (see below) by leaving funds with your employer (if allowed to do so).
  • Advantages that prompt many clients to rollover their retirement plan to their own IRA include:
    • Tax-Free Transfer: Funds transferred directly to your IRA custodian can postpone taxes.
    • Investment Flexibility: Self-directed IRAs offer a wide range of programs as opposed to the often restrictive employer approved funds in 401(k)s.
    • Administrative Convenience: Withdrawals and investment changes can be done directly without working through an HR department plan administrator or plan custodian.
  • Costs: Employer plans often receive fee discounts, so be sure to weigh any cost increases against benefits before making a decision.

2.  IRA

When contemplating IRA withdrawals, keep these in mind:

  • Those under age 59 ½ could face a 10 percent tax penalty in addition to having all withdrawals recognized as ordinary income. Consider:
    • Substantially Equal Payments: For those who can take early up to age 59 ½, IRC Sec 72t offers an exception to the 10 percent penalty for withdrawals taken in substantially equal payments until age 59 ½.
    • Net Unrealized Appreciation (NUA): For those with employer stock in their 401(k), the special NUA rule allows for ordinary income tax on the cost basis upon withdrawal.
  •  Gains receive long-term capital gains when subsequently sold.
  • Employer stock can be rolled over to your IRA while preserving the NUA tax advantage so long as the transfer is done “in-kind.”

3.  Required Minimum Distributions

Generally all retirement plans must start distributions by April 1st of the year following the one in which the owner reaches age 70 ½.

  • Amount is based on the prior year end plan balance and owner’s life expectancy.

4.  Roth Conversion

Because Roth IRAs allow tax-free qualified withdrawals, clients may consider converting all or a portion of their traditional IRAs. Key factors:

    • Pre-tax portion of IRA (that which has not yet been taxed) is taxed at time of conversion.
      • That tax is an upfront cost that takes several years to “make up” before the account is even which makes it important to weigh that cost against potential Roth benefits.
    • Premature 10 percent penalty does not apply even if under 59 ½.
      • As long as no subsequent withdrawals are made until after 59 ½.
    • Withdrawals qualify as tax-free if done after age 59 ½ and five years after the first Roth was established, as well as for death, disability and for first time home buyers.

5.  Social Security Retirement Benefits

Can be tax-free or partially tax free depending on total income. Being aware of the rules can help:

  • Gross Income (P-AGI).
    • Preliminary Adjusted Gross Income includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.
    • For P-AGI over $25,000 ($32,000 for married) 50 percent of benefits become taxable.
  • There is no age forgiveness. So, for clients whose income may be near these thresholds, it is important to coordinate discretionary income such as IRA withdrawals.

Distributions earned from investments not held in retirement plans or IRAs are taxable when paid even if reinvested. Strategies to consider:

  • Mutual funds typically pay out capital gains near year end regardless of the time shares have been held. Therefore, we advise clients to consider postponing fund purchases until after the fund’s “record date.” A record date is the date established by a mutual fund issuer for determining the holders who are entitled to receive a distribution or dividend.
  •  Municipal bond interest can be double tax-free for those in your state of residence.
    • Recall interest is added to your P-AGI calculation when figuring social security taxation.

Annuity income may be fully or partially taxable. Key factors include:

  • Contributions that used after-tax dollars are not taxable when distributed.
  • Annuity withdrawals must be taxed as earnings first, before tax-free principal can be accessed.
  •  Annuitization payments are proportionally taxed based on an “exclusion ratio” until all principal has been distributed. Afterwards 100 percent of payments may be fully taxable.

6.  “Bunching” Income and Deductions

To help reduce taxes in alternate years, consider accelerating income when there are excess deductions.

  • Similarly, accelerating your itemized deductions (medical expenses, state and local income and sales taxes, mortgage deduction, charitable contributions) when the discretion exists to do so, can help offset higher income years and protect against deduction “phase outs.”

7.  Spend Principal to Delay Taxable Distributions

In theory we are taught it is taboo to spend principal. In practice, that spent principal could be replaced with earnings from other accounts that are not tapped. The goal is to enhance our tax control without sacrificing future cash flow. This can be done with careful planning to help preserve long-term cash flow potential.

  • Spending long-term capital gains can give us tax advantages and similarly allow the untapped account to potentially continue growing uninterrupted.
  •  Generate qualified dividend income which receives tax-favored treatment.

8.  Gift Appreciated Assets

Many of us are gratified by making charitable contributions. Doing so using appreciated assets can give the same gratification with greater tax benefit. That’s because the donor receives a charitable deduction for the asset’s current market value without having to recognize the taxable gain.

oursolutionstrategies

Those proud of paying taxes in the lowest bracket may be missing an opportunity to enhance cash flow. In many situations there may be more advantage to taking additional income so to “fill up that low tax bracket cup” and build a cushion for future years.

With so many moving parts it is important to reassess annually with both your CPA and your financial planner so they can help coordinate your retirement income and help you achieve a “Life Well Lived”.

*Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options are different and may have distinct advantages and disadvantages.

  • Roll assets into an IRA
  • Leave assets in your former employer’s plan, if plan allows
  • Move assets into a new employer’s plan, if plan allows
  • Cash-out or take a lump-sum distribution

 

Each of these options has advantages and disadvantages and the one that is best depends on your individual circumstances. You should consider features such as investment options, fees and expenses, and services offered. Your Financial Advisor can help educate you regarding your options so you can decide which one makes the most sense for your specific situation. Before you make a decision, read the information provided in this piece to become more informed and speak with your current IRA trustee/custodian and tax professional before taking any action.

When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees & expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distribution begin and protection of assets from creditors & bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets. 

Investors should consider the investment objectives, risks, charges, and expenses of an investment company carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of WFAFN, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation. 

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.KauffmanWealthManagment.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.